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In the calculations of base case Npv why tax has been charged for the year 0,1 and 2 respectively when there is actually loss and negative cash flows.Please clarify kindly.
One more thing john when we raise a loan do we add the relevant issue cost or transaction cost to the loan amount and than charge interest.Because in some answers i have seen they are adding issue cost to the loan amount and than charging interest.
Thank you.as some times i have seen in calculating the cost of debt specially in Mctee june/2005 when doing IRR opening balance of the loan is free of issue cost but at redeemption it includes opening balance plus issue cost.please clarify whether the opening balance should be free of both issue or transaction cost.its confusing me in APV as in some apv calculations i have seen although cant remember sometimes they add the issue cost and than calculates tax savings but in other cases they deduct issue cost and than calculates tax savings.Thank you.
They haven’t deducted tax – they have added a tax saving.
It is because we always assume that the company is already making profits and therefore paying tax. So if a new project makes a loss, it is reducing the total profit of the business and therefore saving tax.
ok so this is going to be same for all questions where company makes loss we add tax savings if losses are not allowed to carry forward.like in Tramont co(pilot paper) they have not added tax in the year where there is a loss.is it because they were allowed to carry forward losses?Thank you.
could you please kindly answer the issue cost query please? I am doing self study so you are my only teacher to whom i can refer questions.Thanks for your patience.
But in Tramont the investment is in a different country – losses in one country cannot be set off agains profits in a different country.
With regard to issue costs, it depends on the wording of the question as to whether they come out of the amount raised, or whether they are paid out of other funds.
Sometimes the working doesn’t really make it clear, and in that case you get the marks whichever you assumed (provided, as always, that you stated your assumption).
Thank you for your kind reply.So if investment in same country and there is loss in one year we always assume we get tax credit.Am i correct on this John?D i need to mention thuis assumption by the way in the report.
Thank youYes (although call it a tax saving rather than a tax credit), unless the question specifically says differently.
And yes, do state the assumption in the report (even though it is a standard assumption).
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